Page 193 - DMGT554_RETAIL_BUYING

Retail Buying

Notes or more rival firms. Eventually, the predator hopes to raise prices and earn back enough profits
to compensate for the losses during the period of predation. The firm challenging prices as
being predatory bears the burden of proving three things: (1) The predator has significant
market power; (2) The predator prices some goods at least below its total costs, including an
allocation for overhead costs for a significant period (some courts require prices to be below
variable costs, which for retailers would probably be the cost of merchandise without any
allocation of overhead); and (3) There is a reasonable likelihood that the predator will be able to
recoup its predatory losses. Some states have old statutes that declare it illegal to sell merchandise
at unreasonably low prices, usually below their cost. However, a retailer generally may sell
merchandise at any price so long as the motive isn’t to destroy competition.

Example: Independent retailers in small towns have long accused Wal-Mart of selling
goods below cost to drive them out of business and then boosting prices after seizing control of
the local market.
Wal-Mart maintains that it hasn’t violated the law because it didn’t intend to hurt competitors.
But it admits it has sold some products below cost, as do other retailers. These loss-leader
products are intended to attract customers into the store where it is hoped, they will then buy
other products that are priced to be profitable. Wal-Mart claims its loss leaders are part of its
everyday low price strategy. More competition leads to lower prices, while less competition
leads to higher prices. Wal-Mart’s so-called predatory pricing strategy has been tested in the
courts. After an early conviction in a lower court, the Arkansas Supreme Court ruled that the
chain had no intent to destroy competition through its practice of selling a revolving selection
of prescription and nonprescription drugs at less than cost. In essence, the Arkansas Supreme
Court distinguished loss-leader pricing, even by a firm with market power, as a legitimate
competitive tactic from predatory pricing.

12.3.2 Vertical Price-fixing

Vertical Price-Fixing involves agreements to fix prices between parties at different levels of the
same marketing channel (e.g., retailers and vendors). The agreements are usually to set prices at
the Manufacturer’s Suggested Retail Price (MSRP). So pricing either above or below MSRP is
often a source of conflict.
Resale price maintenance laws, or fair trade laws, were enacted in the early 1900s to promote
vertical price-fixing and have had a mixed history ever since. Initially, resale price maintenance
laws were primarily designed to help protect small retailers by prohibiting retailers to sell
below MSRP. Congress believed that these small, often family-owned, stores couldn’t compete
with large chain stores like Sears or Woolworth, which could buy in larger quantities and sell at
discount prices. By requiring retailers to maintain manufacturers suggested retail prices, however,
prices to the consumer may have been higher than they would have been in a freely competitive
environment.
Due to strong consumer activism, the Consumer Goods Pricing Act (1975) repealed all resale
price maintenance laws and enabled retailers to sell products below suggested retail prices.
Congress’s attitude was to protect customer’s right to buy at the lowest possible free market
price even though some small retailers wouldn’t be able to compete. For instance, in a 2000
settlement, Nine West, the women’s shoe marketer, agreed with the Federal Trade Commission
(FTC) not to fix the price at which dealers may advertise, promote, offer of sale or sell any
product. The firm also agreed to pay $34 million to state attorneys general. The money is being
used to fund women’s health, educational, vocational, and safety programs.

Unfortunately, some vendors coerce retailers into maintaining the MSRP by delaying or cancelling
shipments. A less risky tactic from a legal perspective is for a vendor to simply announce it will

188 LOVELY PROFESSIONAL UNIVERSITY